Flashcards in Chapter 1 Deck (33):
What are the two key variables in an investment decision?
1. Rate of return
2. Uncertainty or risk
How do you calculate the rate of return?
(Share price appreciation + Dividends Received) / Initial Investment
What should financial information help investors and creditors evaluate?
What does cash basis accounting measure?
Measures difference between cash receipts and cash payments
What is the difference of cash receipts and cash payments?
Net operating cash flow
What does accrual basis accounting measure?
Measures difference between revenues and expenses
What is the difference of revenues and expenses?
Net income or loss
What is the hierarchy of stand-setting authority?
3. Private Sector > FASB
What are the key aspect of Sarbanes-Oxley Act?
1. Oversight board
2. Corporate executive accountability
3. Non-audit services
4. Retention of work papers
5. Auditor rotation
6. Conflicts of interest
7. Hiring of auditor
8. Internal control
What is a principle-based or objective-based approach to standard setting?
Places importance on professional judgement as opposed to following a list of rules
What is the conceptual framework?
The conceptual framework provides an underlying foundation for accounting standards. It guides the selection of events to be accounted for, how to measure these events, and a means of summarizing these events to interested parties
What are the three elements of relevance?
1. Predictive value
2. Confirmatory value
What are the three elements of faithful representation?
2. Free from error
What are the six elements of decision usefulness?
2. Faithful representation
What is the economic entity assumption?
It is the assumption that presumes that economic events can be identified with a specific economic entity
What is the going concern assumption?
It is the assumption that presumes that an economic entity will continue to operate indefinitely
What is the periodicity assumption?
It is the assumption that allows the life of an economic entity to be divided into artificial time periods to provide timely information
What is the monetary unit?
The monetary unit used in U.S. financial statements is the U.S. dollar
What is meant by disclosure?
The process of including additional pertinent information in the financial statements and accompanying notes
When should a company recognize revenue?
When goods or services are transferred to the customer for the amount the company expects to receive in exchange for those goods or services
What is historical cost?
Original transaction value adjusted for depreciation and amortization
What is net realizable value?
The amount of cash in which an asset is expected to be converted in the ordinary course of business
What is present (or discounted) value?
Calculated by removing the time value of money from future cash flows
What is fair value?
The price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What is the market approach to fair value?
Valuation based on market information
What is the income approach to fair value?
Estimates future amounts and then mathematically converts those amounts to a single present value
What is the cost approach to fair value?
Estimate the amount that would be required to buy or construct an asset of similar quality and condition
What is the full disclosure principle?
Requires that financial reports should include any information that could affect the decisions made by external users
Where are parenthetical or modifying comments placed?
On the face of financial statements
What are disclosure notes for?
Articulate additional insights about the financial statements
What are supplemental schedules and tables?
Report more detailed information than is shown in the primary financial statements
What is the revenue/expense approach?
Revenue and expenses are recognized and measured first followed by asset/liabilities